The new sheriff

Mary Schapiro is a seasoned regulator, but she missed Madoff's Ponzi scheme. Now, as SEC boss, she intends to show the world she's tough enough to be Wall Street's top cop.

By Nina Easton, Washington editor

Last Updated: March 5, 2009: 1:24 PM ET

Schapiro is taking over a troubled agency.

Schapiro's to-do list

At her nomination hearing, Schapiro signaled a sharp change in direction for the troubled SEC. Here's what she had to say about some key issues:

On credit default swaps

"I absolutely believe they need to come under the umbrella of federal regulation. We need a centralized clearinghouse for these transactions."

On insurance

"We should have federal oversight of insurance companies, particularly those [like AIG] that create systemic implications."

On hedge funds

"I absolutely support proceeding with registration so that we could have a much better handle on who is out there and what they're doing ... at an absolute minimum."

On international accounting standards

"I will take a big, deep breath and will not necessarily feel bound by the existing [August 2008] roadmap that is out for comment."

(Fortune Magazine) -- Bernie Madoff's talent for eluding capture may be weighing on her mind today, but Mary Schapiro's path in life was charted by an earlier money scandal: the Hunt
brothers' audacious attempt to corner the world's silver market in the late '70s.

Schapiro was then a law student at George Washington University. Her first love, however, was anthropology, Schapiro's major when she was an undergrad at Pennsylvania's Franklin &
Marshall College. During the fall of 1979, as oil tycoon Nelson Bunker Hunt and his brother William wreaked havoc on the silver market - more than quadrupling the metal's price in four
months - it dawned on Schapiro that she didn't have to trek to the South Pacific or the Amazon basin to study ancient human behavior patterns: She could get a job at the SEC, which she
did.

"From an anthropological perspective, I was fascinated by these guys who thought they were bigger than the market and bigger than the world," Schapiro tells Fortune, sitting in a
green-on-white Asian-print armchair in her sunny corner office overlooking the U.S. Capitol. "They were causing industrial processes' costs to go through the roof. They were causing
beautiful candelabra and silver services to be melted down and sold. And so I decided to go to the agency, and to investigate the Hunt brothers as a trial attorney." That SEC assignment
didn't last long, but her fascination with human greed - and its toll on hapless victims - did.

Now, as the newly installed SEC chairwoman prepares to take on a whole new round of masters of the universe, she is applying the same anthropological eye to bigtime crooks as well as to
their complicated relationship with the bureaucrats who are paid to police them. During her nomination hearing, Schapiro, 53, repeatedly pledged that there would be no more "sacred cows,"
a not-so-subtle reference to former Nasdaq chief Madoff, who eluded not only the SEC but also the industry regulator led by Schapiro, called FINRA.

Do government and industry inspectors get blinded by the bright light of Wall Street celebrity? "I do think people suspend disbelief, lose their skepticism sometimes, and that's something
to fight against constantly," she says. "The key is essentially never to trust anyone." After once being "burned" by somebody she thought was "giving me good information and wasn't,"
Schapiro says she erected her own wall of skepticism and now avoids socializing with those she regulates.

Just as prominent scam artists know how to curry favor with Wall Street cops, they are adept at finding social linkages with their victims. Schapiro classifies Madoff's alleged $50
billion Ponzi scheme, which especially victimized well-known Jewish figures and charities, as that form of "affinity fraud." Madoff "clearly preyed on a community that he was part of,"
she says. "Lots of people invested based on who they were and who he was, without a lot of due diligence and with not a lot of concern by people who are specifically paid to do due
diligence. A lot of this is sociologic, psychological, and it's really important that regulators have some understanding of that."

This fascination with epic greed comes from a soft-spoken woman who looks and talks more like a librarian (her mother's profession) than a head-bashing law enforcer. She stunned SEC
staffers on her first day in office by telling them that unless she's on the phone or in a meeting, they are welcome to drop by her office. "Warm and open, engaging and curious," is how
her friend and former SEC chairman Arthur Levitt describes her.

Those attributes, always admirable, might nevertheless be secondary on a list of traits to be desired in an SEC chief at this pivotal moment. And so, in the tight-knit world of securities
lawyers who cycle in and out of government with cicada-like regularity, some are asking, Is Mary Schapiro tough enough to turn a disgraced agency upside down? "It's the $64,000 question,"
says a longtime friend. The first female SEC chief in history insists she is. "I've been called the Muammar Qaddafi of regulation," Schapiro says, a little unconvincingly given her
trademark pleasant smile. Then she adds, "We have got to build this institution back to the kind of place that's widely respected and embraced by the public, and we won't be able to do
that if we don't step on some toes. I'm tougher than people think."

So far, the evidence is on Schapiro's side. In her first weeks she replaced the agency's director of enforcement, bringing in the well-respected Deutsche Bank general counsel Robert
Khuzami, who prosecuted a number of high-profile financial cases during his 11-year tenure with the U.S. Attorney's Office for the Southern District of New York. (Khuzami was also a lead
prosecutor against Omar Abdul-Rahman, the Egyptian cleric now serving a life sentence for the 1993 World Trade Center bombing.) She told Fortune she has directed Khuzami to move
high-impact cases to the front of the queue. "Speed is really important," she says.

Just as important, Schapiro reversed the policy of her predecessor, the much-criticized Christopher Cox, that certain enforcement actions be approved by a consensus of five commissioners.
That passive-aggressive policy gave antiregulatory ideologues on the commission license to block penalties, discouraging staff from pursuing big cases.

With the agency reeling from its failure to detect Madoff's decades-long scheme - not to mention the alleged $8 billion scam by billionaire R. Allen Stanford - Schapiro has launched an
overhaul of how the SEC handles incoming tips of wrongdoing. She will also seek funds for badly needed upgrades to the agency's technology, as she did at FINRA.

Still, the Madoff and Stanford cases raise questions about Schapiro's own past performance. For 12 years she was the broker-dealer industry's top regulator, first at NASD and later as
chief executive of succeeding firm FINRA, which is short for Financial Industry Regulatory Authority. Both organizations missed the Madoff and Stanford schemes. At her nomination hearing,
Schapiro blamed the Madoff oversight on "stove-piped" regulation, saying FINRA had authority only over his broker-dealer activities, not the investment advisory functions where books were
kept that might have suggested a Ponzi scheme. Likewise, FINRA officials say they lacked jurisdiction over Stanford's overseas activities.

But Barbara Roper, director of investor protection for the Consumer Federation of America, rejects Schapiro's defense on Madoff. "Not only was the firm exclusively regulated as a
broker-dealer over most of the lifespan of the fraud, but the NASD/FINRA rules grant that agency broad authority to gather information about and provide some oversight of activities that
are related to the firm's brokerage activities," she wrote in a letter to the Senate Banking Committee.

Schapiro has spent nearly her entire career as a regulator - first as an SEC commissioner, later in a brief stint as chairwoman of the Commodity Futures Trading Commission under President
Clinton. But it is her long leadership at FINRA - an industry-created regulator that oversees the nation's 5,000 brokerage firms - that has drawn both praise and criticism. (Schapiro
entered the system as president of NASD regulation in 1996; as CEO of FINRA, a merger of NASD and NYSE divisions, she earned $2.8 million in 2008.)

SEC Commissioner Elisse B. Walter, who was at Schapiro's side during much of that career, recalls that the NASD - like the SEC today - was under fire for laxity when Schapiro took over.
"It's deja vu," says Walter, who adds that Schapiro faced resistance from inside the organization as she overhauled and strengthened its oversight. Says consumer advocate Roper: "Most
people feel that Mary improved NASD regulation when she took over. They're not as tough as we'd like them to be, but they're not the lapdog to industry that they used to be."

At her nomination hearing, Schapiro laid out a vision of expanded regulation of the financial markets. She supports a federally regulated clearinghouse for credit default swaps, SEC
registration for hedge funds, federal regulation of large insurers like AIG, and a new system of compensating credit agencies (possibly a fee imposed by exchanges) that would take
conflicts of interest out of the system.

As if that's not enough to keep Schapiro racing, some fear the SEC's future is in jeopardy because of President Obama's determination to impose sweeping regulatory changes that turn the
Federal Reserve into a super-regulator charged with preventing systemic risk to the financial system. "The SEC is in danger of being almost totally marginalized," says Levitt. "The
Federal Reserve is a perfectly dreadful regulator. They have allowed the buildup of runaway leverage that brought American banks to their knees. She's going to have to wrestle with people
[inside the administration] who have very sharp elbows."

Walter insists that Schapiro's management style is well suited to an agency badly in need of a morale boost. "She is hardly an imperial leader," Walter says. "She recognizes there is a
leadership structure but that we're all in this together. Everyone takes ownership of problem. Everyone is heard. That inspires tremendous loyalty." And right now Schapiro will need a
body of intensely loyal soldiers at her side if she has any chance of restoring the SEC's credibility.